Smallcase investing - Who should not invest in a smallcase?

Smallcase investing is where instead of buying one stock or a few stocks, you can buy a portfolio or a basket of stocks or Exchange Traded Funds (ETF).

It is like going to a thali restaurant and placing an order for a thali. The chef at the thali restaurant prepares the best dishes and arranges in on a platter that is served to you.

You can also place an ala carte order in the same restaurant if you know what sells best at the restaurant and what you like.

If you are good at stock selection, you may create these smallcases yourself. Or you could subscribe to smallcases for a fee that are carefully curated by portfolio managers and investment advisors based on a certain theme or strategy.

You can place an order to buy/sell a portfolio with one-click. The stocks you bought will appear in your investment account immediately. And, you get to monitor the performance on a real-time basis with the option to exit at any time if you don't want to continue.

A lot of the influencers and youtubers are talking about how they invest in smallcases and their persuasion and strategy is paying off wherein many novice retail investors are curious about smallcase and want to also make these 2-3x returns by investing here.

If smallcases have enticed you and you have decided to take the plunge, here are a few things you might want to consider before you start investing:

Subscription fees

If you are paying subscription fees of ₹12,000 and invest only ₹50,000 that is the minimum amount of investment in a smallcase, it would not work.

Why?

If you are paying so much upfront, you better invest much more as if you compare this with the expense ratio in mutual funds, it will be much higher.

Increasing your investment is one way of making sure you get back much more than what you pay.

In case of mutual fund, the expense ratio is only about 1 or 2%, you must at least invest ₹6,00,000 in a smallcase to be able to match the cost of mutual fund.

The adverts and YouTube videos don't tell you this. The minimum amount of investment in a smallcase will be less but it won't make sense unless you invest a lot more.

How much are you willing to invest in a smallcase portfolio?

One thumb rule to follow while investing for the first time is invest only if you have money to throw away i.e. you are ok to lose it. If you can't do that, its best to avoid stock investing.

Knowing what risk you can take up is the first step in stock investing.

Transaction costs and taxes

The smallcase portfolio manager will ask you to rebalance your portfolio periodically which means you will have to click and confirm if you want to buy or sell stocks and the transaction will be executed by your broker.

The broker will charge you per transaction and you also will bear taxes on buying and selling as you will be doing this often.

In terms of taxes, Short Term Capital Gain (STCG) is charged at 15% if you hold stocks for less than 12 months.

The transaction costs are different for different brokers (Zerodha and IIFL will charge you different amounts).

You might want to find out how much your broker is charging per transaction before you buy a smallcase.

Your return expectation

The CAGR for most of the smallcases in the last 12 months has been very high and if you are expecting to get so much return on your portfolio, it may not happen.

If you had invested a year back, you might be getting these double digit returns but if you start investing now, I'm not so sure you will be able to get so much.

If you understand and expect reasonable returns for your holding period and are willing to accept the risk associated with it, only then should you consider smallcase investments.

What to do if things don't go as planned

Adani trouble, I bought a few shares and now I'm not able to sell it as there are no buyers.

If you are at a similar position, you must know that once you buy a stock and if your portfolio rebalancing requires you to sell it, the smallcase will throw up an error if there are no buyers willing to buy what you want to sell.

The circuit breakers are in place and you will not be able to reset the error in your account till things get back to normal.

Is real time information really good for you

Seeing your portfolio perform bad might force you to stop the smallcase midway. If you can't bear the loss, it is best to avoid smallcase.

That's a total rant from my own experience of experimenting with a smallcase. That said, I would say that if you are not a novice at stock investing and are able to understand smallcase and would still like to try it, keep these things in mind before you venture into it.

It is not for everyone but if you do have a long term time frame and are ready to experiment and can take the volatility associated with a smallcase, go ahead and buy it.

P.S - I am not an investment advisor and I'm writing from my own experience of trying to invest in a smallcase just to understand how it works.

Let me know about your experience of investing in a smallcase by writing to me at sreelakshmi@berupeewise.com